TAX REFORMS SUGGESTIONS

SAKIB SHERANI
PAKISTANS tax woes are not new it has been struggling with low tax collection
for several decades.
The tax issue has several dimensions which are, by now, widely recognised: the
unwillingness of an affluent elite to pay their dues; the token contribution to tax revenue
by the countrys parliamentarians, barring a handful; widespread exemptions and
privileges granted to the rich and powerful, many of which have been coded into law; a
rising tax burden on honest taxpayers and formal businesses; and, finally, the growing
inability of government to finance the delivery of efficient and effective public services to
a burgeoning population.
The on-going collapse of international oil prices has brought the distributional
consequences of Pakistans inequitable and unfair tax system into sharp relief. World oil
prices have fallen by 50pc since June last year; the government, fearing a huge
revenue loss, has transferred only 23pc of the benefit to consumers.
By my estimation, if the entire decline in international oil prices had been passed on
domestically, consumers would have benefited to the extent of over Rs 500 billion (the
impact on transportation fuel alone). By passing on a lower reduction, and increasing
the sales tax, the transfer to consumers has been trimmed to Rs 175bn, a significant
welfare loss of over Rs300bn at current prices.
So why has the government chosen to deprive citizens of a substantial increase in their
disposable incomes? Because successive governments have been unable, and
unwilling, to tax the incomes of wealthier Pakistanis through direct taxation, and have
instead relied on measures such as the sales tax, which place a heavier burden on
consumers with lower incomes.
An indication of the magnitude of tax avoidance by the elite in Pakistan was provided by
a progressive, forward-looking exercise conducted by none other than the Federal
Board of Revenue (FBR) in 2012. Building on a pilot version that Shaukat Tarin had
instructed to be conducted as finance minister in 2009, and in which I was directly

involved, the Nadra and allied databases were queried to identify well-off Pakistanis
with tell-tale signs of being affluent, and matching this list with the tax register.
The result was a nation-wide list of 3.2 million Pakistanis who had multiple properties,
bank accounts, club memberships etc, but who did not possess a national tax number
(NTN). If even half of this list is eligible to pay tax, and if the average annual tax liability
of each of these people is a meagre Rs100,000 (US$ 1000), the national exchequer
would see an increase of Rs160bn in the first year alone.
To put this in perspective, the additional tax revenue would represent 20pc of the
current collection from income tax, and would exactly triple the number of tax filers in
the country. It would also mean that the government of the day can reduce indirect
taxes, or increase spending on direly-needed public programmes, by the same amount.
Or, it could pass on a higher portion of the windfall accruing from the fall in world
commodity prices.
To its credit, this government has taken several important steps in the direction of tax
reform. First and foremost, it has appointed a clean and untainted chairman FBR who
understands what needs to be done. The chairman has already set in motion a process
of cleansing the organisations senior ranks of people with tainted reputations
something which has not happened in years.
The government has also published two important tax directories one for
parliamentarians, and the other for general taxpayers. It has also constituted a Tax
Reforms Commission (TRC). Credit for these initiatives goes to the finance minister.
While these initiatives, together with the review of all exemptions granted via SROs, are
important first steps, they are far short of what is required. FBR now denies knowledge
of any list of 3.2 million potential taxpayers, and is intent on sending out 100,000 tax
notices a year an exercise which will take 32 years at the current rate to cover all the
affluent Pakistanis on FBRs own, now hidden, list of 2012.
Without a complete overhaul of the tax system, underpinned by a completely new FBR
and perhaps a simplified new tax code, Pakistan cannot hope to widen the tax base and
institute an equitable and fair tax system. To do this, a few of the first, fundamental
steps will need to be:
Give the TRC a much wider mandate, one that is aimed at studying and modernising
the design of the tax system, not merely tweaking more revenue within the current year
from the existing one (an outstanding example is the work of the Mirrlees Commission
in the UK);

 Recognising that the sequencing of tax reform will be critical to success. This will
mean prioritising reform of tax administration and the simplification of the tax code, in
the medium term, to improve the confidence of taxpayers and achieve greater yield from
existing measures;
Make a few big, visible moves on tax policy to demonstrate the governments
commitment to bring equity and fairness to the tax system. Foremost among these
steps would be owning the list of 3.2 million and acting on it. Other measures could
include a major revision in the rate list values of urban property and the imposition of a
capital gains tax, and the elimination of tax privileges granted to the elite in the income
tax ordinance;
Insulate FBR from the political ecosystem. Granting constitutional protection to tenures
of the chairman and members will be an important start;
Instituting a full-fledged organisational development (OD) programme for FBR;
Undertaking a major overhaul of FBRs IT systems and software development
processes.
If done, these steps will represent a true break from the recent past and leave a reform
legacy for the PML-N government.
The writer is a former economic adviser to government, and currently heads a
macroeconomic consultancy based in Islamabad.
Published in Dawn, January 9th, 2015